New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Brussels Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com June 5, 2018 Volcker Rule Federal Banking Agencies and CFTC Approve Notice of Proposed Rulemaking to Amend Volcker Rule Regulations; SEC Expected to Follow EXECUTIVE SUMMARY On May 30, 2018, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) approved a notice of proposed rulemaking to amend the regulations implementing the so-called “Volcker Rule” provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Each of the other agencies responsible for implementing and enforcing the Volcker Rule (collectively with the Federal Reserve, the “Agencies”) 1 subsequently approved or is expected to approve in the very near term a substantially similar notice of proposed rulemaking (collectively with the Federal Reserve’s notice of proposed rulemaking, the “NPR”). 2 The NPR follows recent statements by representatives of the Agencies, 3 a 2017 report on financial reform by the U.S. Department of the Treasury 4 (the “Treasury Report”) and a public comment pr ocess initiated by the OCC 5 (the “OCC RFI”) following the Treasury Report, each of which highlighted concerns that the current Volcker Rule regulations are overly complex and should be tailored to reduce compliance costs and clarify the application of the regulations. The NPR also comes shortly after Congress’s May 24, 2018 enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Reform Act”), which exempts certain smaller banking entities from the Volcker Rule entirely. 6 We believe that there are two key takeaways from the NPR: First, the NPR proposes limited and targeted changes to the proprietary trading and compliance program provisions of the Volcker Rule regulations and, to a significantly lesser extent, the covered funds provisions. The Agencies’ stated objectives for these changes include streamlining and clarifying the application of their regulations and tailoring the compliance program and certain other requirements based on the size and scope of a banking entity’s tra ding activities. For example, a banking entity with less than $10 billion in gross trading assets and liabilities would be
89
Embed
Volcker Rule - Sullivan & Cromwell...from the Volcker Rule entirely any banking entity that has (i) less than $10 billion in total consolidated assets and (ii) total trading assets
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Brussels
Tokyo Hong Kong Beijing Melbourne Sydney
www.sullcrom.com
June 5, 2018
Volcker Rule
Federal Banking Agencies and CFTC Approve Notice of Proposed Rulemaking to Amend Volcker Rule Regulations; SEC Expected to Follow
EXECUTIVE SUMMARY
On May 30, 2018, the Board of Governors of the Federal Reserve System (the “Federal Reserve”)
approved a notice of proposed rulemaking to amend the regulations implementing the so-called “Volcker
Rule” provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”). Each of the other agencies responsible for implementing and enforcing the Volcker Rule
(collectively with the Federal Reserve, the “Agencies”)1 subsequently approved or is expected to approve
in the very near term a substantially similar notice of proposed rulemaking (collectively with the Federal
Reserve’s notice of proposed rulemaking, the “NPR”).2
The NPR follows recent statements by representatives of the Agencies,3 a 2017 report on financial reform
by the U.S. Department of the Treasury4 (the “Treasury Report”) and a public comment process initiated
by the OCC5 (the “OCC RFI”) following the Treasury Report, each of which highlighted concerns that the
current Volcker Rule regulations are overly complex and should be tailored to reduce compliance costs
and clarify the application of the regulations. The NPR also comes shortly after Congress’s May 24, 2018
enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Reform Act”),
which exempts certain smaller banking entities from the Volcker Rule entirely.6
We believe that there are two key takeaways from the NPR:
First, the NPR proposes limited and targeted changes to the proprietary trading and compliance
program provisions of the Volcker Rule regulations and, to a significantly lesser extent, the
covered funds provisions. The Agencies’ stated objectives for these changes include streamlining
and clarifying the application of their regulations and tailoring the compliance program and certain
other requirements based on the size and scope of a banking entity’s trading activities. For
example, a banking entity with less than $10 billion in gross trading assets and liabilities would be
Quantitative Metrics Reporting and Recordkeeping ............................................................................. 39
-9- Volcker Rule June 5, 2018
I. TAILORING OF THE PROPOSED RULE’S REQUIREMENTS
Under the 2013 Rule, a banking entity’s total consolidated assets and its trading assets and liabilities
(together with those of its affiliates and subsidiaries) determine the compliance program requirements that
are applicable to the banking entity. Broadly speaking, the calculations of consolidated assets and trading
assets and liabilities for this purpose are conducted either (i) on a worldwide basis in the case of U.S.
banking entities or (ii) with respect to U.S. assets or combined U.S. operations in the case of foreign
banking entities. Depending on these calculations, a banking entity is subject under the 2013 Rule to one
of five different tiers of compliance program requirements, each of which entails a different set of required
policies and procedures, recordkeeping, internal controls and other compliance program elements, as
well as, potentially, quantitative metrics reporting and CEO attestation requirements.25
Under the Proposed Rule, banking entities are divided into three categories—each of which is subject to
a distinct set of compliance program requirements and other substantive requirements, as summarized in
Figure 1 below—based on the amount of the banking entities’ trading assets and liabilities as calculated
in the following manner (referred to as “TALs” in this Part I):
In the case of a banking entity that is not and is not controlled by a foreign banking organization
(“FBO”), the banking entity’s TALS equals the average gross sum of the banking entity’s and its
affiliates’ and subsidiaries’ trading assets and liabilities (excluding trading assets and liabilities
involving obligations of, or guaranteed by, the United States or any agency of the United States)
over the previous consecutive four quarters, as measured as of the last day of each of the four
previous calendar quarters, on a worldwide consolidated basis.
In the case of a banking entity that is a FBO or is controlled by a FBO, the calculation of TALs is
based on the combined U.S. operations of the top-tier FBO (including all subsidiaries, affiliates,
branches and agencies of the FBO operating, located or organized in the United States),26
except
that, for purposes of determining whether a FBO has “limited trading assets and liabilities” (i.e.,
TALs of less than $1 billion) the calculation is conducted on a worldwide consolidated basis.
Therefore, a FBO that has less than $1 billion in TALs based on the combined U.S. operations of
the top-tier FBO but more than $1 billion in TALs on a worldwide consolidated basis would be
deemed to have “moderate trading assets and liabilities.”
In addition to the relief that the Proposed Rule provides for banking entities with “limited trading assets
and liabilities”—i.e., banking entities with TALs of less than $1 billion, calculated on a worldwide
consolidated basis—Section 203 of the Reform Act exempts from the Volcker Rule any banking entity
that has (i) less than $10 billion in total consolidated assets and (ii) total trading assets and trading
liabilities representing less than 5% of its total consolidated assets. The Agencies indicate that they
expect to conduct a separate rulemaking process to address the Reform Act’s amendments that affect
the Volcker Rule.27
The Reform Act does not expressly state how “total trading assets and trading
liabilities” for purposes of Section 203 should be determined, and the Preamble does not specify whether
that figure will be calculated in the same manner as TALs.
-10- Volcker Rule June 5, 2018
The following table summarizes the categorization of banking entities under the Proposed Rule based on
whether they have “significant trading assets and liabilities,” “moderate trading assets and liabilities” or
“limited trading assets and liabilities” (in each case, as defined in the Proposed Rule) and whether they
are exempted from the Volcker Rule by Section 203 of the Reform Act.
Figure 1: Categorization of Banking Entities Under the Proposed Rule and the Reform Act
Categorization
Under Proposed
Rule / Reform Act Criteria for This Level
Compliance Program
Requirements
Metrics
Reporting
CEO
Attestation
Additional
Permitted Activity
Requirements
“Significant trading assets and liabilities”
TALs equal or exceed $10 billion.
Calculation of TALs is based on (i) in the case of U.S. banking entities, all affiliates and subsidiaries on a worldwide basis and (ii) in the case of FBOs and their subsidiaries, combined U.S. operations only.
Six pillars required under the 2013 Rule (i.e., written policies and procedures, internal controls, management framework, independent testing, training and records).
Subject to the same additional covered fund documentation requirements as under the 2013 Rule.
28
Yes.
A banking entity with $50 billion or more in TALs is subject to increased frequency of reporting require-ments.
Yes. Subject to compliance requirements in order to rely on exemptions for underwriting, market making-related and risk-mitigating hedging permitted activities.
“Moderate trading assets and liabilities”
TALs are less than $10 billion, but greater than or equal to the $1 billon threshold for banking entities with “limited” TALs (see below).
TALs for U.S. banking entities and for FBOs and their subsidiaries are calculated as described immediately above.
Simplified compliance program requirement, which would “allow the banking entity to comply with the applicable requirements by updating existing policies and procedures.”
29
Subject to the Agencies’ “reserved authority” to require the banking entity to apply any requirement applicable to banking entities having “significant” TALs based on size or complexity of the entity’s trading or investment activities, or the risk of evasion.
30
No, unless notified in writing by the relevant Agency.
Yes. --
“Limited trading assets and liabilities”
TALs are less than $1 billon (as calculated on a worldwide basis for all banking entities), and the banking entity is not otherwise exempted by the Reform Act (see below).
No compliance program requirement unless relevant Agency directs otherwise. Subject to the Agencies’ “reserved authority” (see above) to require the banking entity to apply any requirement applicable to banking entities having “significant” or “moderate” TALs.
31
Presumed to be in compliance with substantive provisions (subject to rebuttal by an Agency upon an examination or audit).
32
No, unless notified in writing by the relevant Agency.
--
-11- Volcker Rule June 5, 2018
Categorization
Under Proposed
Rule / Reform Act Criteria for This Level
Compliance Program
Requirements
Metrics
Reporting
CEO
Attestation
Additional
Permitted Activity
Requirements
Not engaged in covered activities
Does not engage in proprietary trading or covered fund activities (other than permitted trading in U.S. government obligations).
None, unless and until the banking entity becomes engaged in covered proprietary trading or covered fund activities.
No, unless notified in writing by the relevant Agency.
--
Exempted by the Reform Act
Banking entity has less than $10 billion in total consolidated assets; and total trading assets and liabilities representing less than 5% of its total consolidated assets.
Not subject to the Volcker Rule or any element of the Proposed Rule.
-12- Volcker Rule June 5, 2018
II. CHANGES TO SPECIFIC REQUIREMENTS AND RESTRICTIONS
This Part II provides an overview of the provisions of the Proposed Rule that would substantively amend
the 2013 Rule’s requirements and restrictions. The following discussion focuses on the aspects of the
Proposed Rule that would, if adopted, directly modify the regulatory requirements that banking entities
must meet in order to comply with the Volcker Rule’s restrictions on proprietary trading and covered fund
activities (and to qualify for certain exemptions and exclusions) and to meet the Volcker Rule’s
compliance program requirement. The extent to which certain of these restrictions and requirements
would apply to any particular banking entity under the Proposed Rule will depend on the banking entity’s
level of trading activities and the other factors explained in Part I of this Memorandum.
Many other aspects of the 2013 Rule that are not discussed in this Part II—including significant issues
that have been the subject of extensive commentary among industry participants—are acknowledged in
the Preamble as warranting further consideration and, potentially, further revisions to the 2013 Rule, but
are not addressed in the Proposed Rule. Rather, these issues are addressed only in the NPR’s questions
and solicitations for comment, as discussed in Part III of this Memorandum.
II.A. PROPRIETARY TRADING
II.A.1. Definitions of “proprietary trading” and “trading account”
As under the 2013 Rule, determining whether a purchase or sale of a financial instrument is “proprietary
trading” depends on whether the transaction is “for the trading account” of the banking entity. The 2013
Rule establishes a three-pronged test of “trading account” status: (i) the “short-term intent prong,” which
includes a rebuttable presumption that this prong captures any purchase or sale of a financial instrument
if the banking entity holds the financial instrument for fewer than 60 days or substantially transfers the risk
of the position within 60 days;33
(ii) the “market risk capital prong”;34
and (iii) the “dealer prong.”35
The Proposed Rule eliminates the “short-term intent prong,” including the 60-day rebuttable
presumption,36
and establishes a modified version of this three-pronged test, as follows:37
Market risk capital prong. As under this prong in the 2013 Rule, the “trading account” definition
captures any purchase or sale of financial instruments that is both a market risk capital rule
covered position and trading position (or a hedge of another market risk capital rule covered
position) if the banking entity, or any affiliate of the banking entity, is an insured depository
institution, bank holding company or savings and loan holding company and calculates risk-based
capital ratios under the market risk capital rule.38
The Proposed Rule modifies the market risk capital prong so that it would include, with
respect to a banking entity that is not, and is not controlled directly or indirectly by a banking
entity that is, located in or organized under the laws of the United States or any U.S. state,
-13- Volcker Rule June 5, 2018
any account used by the banking entity to purchase or sell one or more financial instruments
that are subject to capital requirements under a market risk framework established by the
home-country supervisor that is consistent with the market risk framework published by the
Basel Committee on Banking Supervision.39
Dealer prong. As under this prong in the 2013 Rule, the “trading account” definition captures any
purchase or sale of financial instruments by a banking entity that is licensed or registered, or
required to be licensed or registered, to engage in the business of a dealer, swap dealer or
security-based swap dealer, if the instrument is purchased or sold in connection with the activities
that require the banking entity to be licensed or registered as such (or if the banking entity is
engaged in the business of a dealer, swap dealer or security-based swap dealer outside of the
United States, if the instrument is purchased or sold in connection with the activities of such
business).40
Accounting prong. The Proposed Rule establishes a new prong of the “trading account”
definition (the “accounting prong”) that captures any account used by a banking entity to
purchase or sell one or more financial instruments that is recorded at fair value on a recurring
basis under applicable accounting standards. The Agencies note that this would include, among
other financial instruments, derivatives, trading securities and available-for-sale securities.41
The Proposed Rule includes a presumption of compliance with the proprietary trading
prohibition for a trading desk42
that purchases or sells financial instruments “for the trading
account” solely by virtue of the accounting prong—in other words, a trading desk that is not
captured by the market risk capital prong or the dealer prong. To qualify for this presumption,
the trading desk must, in any 90-calendar-day period, operate at or below an absolute daily
profit and loss threshold of $25 million—i.e., the sum of the absolute values of the trading
desk’s daily net gain or net loss on the trading desk’s portfolio of financial instruments each
business day, reflecting realized and unrealized gains and losses since the previous business
day, based on the banking entity’s fair value for such financial instruments for the preceding
90-calendar-day period, does not exceed $25 million.43
The Agencies state that a banking entity that elects to make use of this presumption with
respect to a trading desk would have no obligation to demonstrate that the trading desk’s
activity complies with the Volcker Rule on an ongoing basis so long as the $25 million
threshold is not breached,44
nor would the banking entity have to assess the accounting
treatment of each transaction of a trading desk that operates pursuant to this presumption of
compliance.45
If the trading desk’s absolute daily profit and loss measurement exceeds $25 million at any
point, then the banking entity would be required to notify the appropriate Agency in
accordance with the Agency’s notification policies and procedures.46
Furthermore, the
Proposed Rule reserves the Agencies’ authority to determine on a case-by-case basis that a
purchase or sale of one or more financial instruments by a banking entity either is or is not for
the trading account, notwithstanding the presumption of compliance.47
In explaining the Proposed Rule’s approach to revising or eliminating elements of the 2013 Rule’s
definition of “trading account” while retaining others, the Agencies observe that “[b]anking entities subject
to the market risk capital prong and the dealer prong have had several years of experience complying
with the requirements of the [2013 Rule] and experience with identifying these activities in other contexts,”
and such banking entities “are able to conduct appropriate trading activities in an efficient manner
-14- Volcker Rule June 5, 2018
pursuant to exclusions from the definition of proprietary trading or pursuant to the exemptions for
permitted activities.”48
The Agencies indicate that the inclusion of the accounting prong is “intended to give greater certainty and
clarity . . . about what financial instruments would be included in the trading account, because banking
entities should know which instruments are recorded at fair value on their balance sheets” and to provide
an “objective means of ensuring that such positions entered into by banking entities principally for the
purpose of selling in the near term, or with the intent to resell in order to profit from short-term price
movements, are incorporated in the definition of trading account.”49
Individual firms should assess the
impact of the accounting prong in their respective cases, including the possibility that it could include
positions that are not within the trading account as defined under the 2013 Rule.
II.A.2. Definition of “trading desk”
Many of the substantive and compliance-related requirements for permitted proprietary trading under the
2013 Rule and the Proposed Rule are determined in relation to a banking entity’s “trading desks.” For
example, compliance with the underwriting and market making-related activities exemptions (including the
RENTD requirements for both such exemptions) is determined at the level of individual trading desks.50
The Proposed Rule’s presumption of compliance under the accounting prong (as discussed in Part II.A.1
above) requires trading desks operating pursuant to that presumption to calculate their profits and losses
at the trading desk level and applies to all the activities of the trading desk.
The Proposed Rule retains the current definition of “trading desk”—that is, “the smallest discrete unit of
organization of a banking entity that purchases or sells financial instruments for the trading account of the
banking entity or an affiliate thereof.”51
The Agencies request comment on various alternatives to this
definition of “trading desk,” noting that banking entities have indicated that, in practice, this definition has
led to uncertainty regarding the meaning of “smallest discrete unit” and has caused confusion and
duplicative compliance and reporting efforts for banking entities that also define trading desks for
purposes unrelated to the Volcker Rule (e.g., internal risk management and reporting and calculating
regulatory capital requirements).52
The Agencies indicate that they are seeking comment on a potential multi-factor definition of “trading
desk” that would be based on the same criteria typically used to establish trading desks for other
operational, management and compliance purposes. In particular, the Agencies suggest an alternative
definition of “trading desk” that is: (i) structured to establish efficient trading for a market sector;
(ii) organized to ensure appropriate setting, monitoring and management review of the desk’s trading and
hedging limits, current and potential future loss exposures, strategies and compensation incentives; and
(iii) characterized by a clearly-defined unit of personnel that typically: (a) engages in coordinated trading
activity with a unified approach to its key elements; (b) operates subject to a common and calibrated set
-15- Volcker Rule June 5, 2018
of risk metrics, risk levels and joint trading limits; (c) submits compliance reports and other information as
a unit for monitoring by management; and (d) books its trades together.53
II.A.3. Underwriting activities
The 2013 Rule includes an exemption for a banking entity’s underwriting activities, which is statutorily
designated as a permitted activity under the Volcker Rule,54
subject to the following conditions (among
others):55
(1) The trading desk’s “underwriting position” must be related to a “distribution” of securities
in which the banking entity is acting as an “underwriter.”56
(2) The amount and type of the securities in the trading desk’s underwriting position must
be designed not to exceed the reasonably expected near-term demands of clients,
customers or counterparties, and reasonable efforts must be made to sell or otherwise
reduce the underwriting position within a reasonable period, taking into account the
liquidity, maturity and depth of the market for the relevant type of security.
(3) The banking entity must establish, implement, maintain and enforce an internal
compliance program that meets specified requirements with respect to underwriting
activity.
(4) The compensation arrangements of persons performing the banking entity’s
underwriting activities must be designed not to reward or incentivize prohibited
proprietary trading.
(5) The banking entity must be licensed or registered to engage in underwriting activity if
and to the extent required by applicable law.
The Agencies retain a number of these conditions in the Proposed Rule, but also propose changes that
are intended to “tailor, streamline, and clarify the requirements that a banking entity must satisfy to avail
itself of the underwriting exemption.”57
In explaining these changes, the Agencies note that, since the
adoption of the 2013 Rule, “public commenters have observed that the significant compliance
requirements in the regulation may unnecessarily constrain underwriting without a corresponding
reduction in the type of trading activities that the rule was designed to prohibit.”58
Accordingly, the Agencies propose the following revisions to the underwriting activities exemption:
Presumption of RENTD compliance. Under the Proposed Rule, a banking entity’s purchase or
sale of a financial instrument is presumed to meet the underwriting RENTD requirement if the
banking entity has established and implements, maintains and enforces limits, based on the
nature and amount of the trading desk’s underwriting activities, on: (i) the amount, types and risk
of its underwriting position; (ii) the level of exposures to relevant risk factors arising from its
underwriting position; and (iii) the period of time a security may be held.59
The Agencies indicate that they believe this presumption would “allow for a clearer
application of the[] exemption[], and would provide banking entities with more flexibility and
-16- Volcker Rule June 5, 2018
certainty in conducting permissible underwriting . . . activities.”60
The Agencies further
indicate that they expect a banking entity to establish these limits “according to its own
internal analyses and processes around conducting its underwriting activities,” which should
include an “ongoing and internal assessment” of RENTD.61
These limits are subject to review and oversight by the appropriate Agency on an ongoing
basis to determine whether the limits are consistent with the statutory standard.62
Furthermore, a banking entity is required “promptly” to report to the appropriate Agency “(A)
to the extent that any limit is exceeded and (B) any temporary or permanent increase to any
limit(s), in each case in the form and manner as directed by the [Agency].”63
The Agencies
indicate that they would expect to closely monitor and review any instances of a banking
entity exceeding a risk limit as well as any temporary or permanent increase to a trading desk
limit.64
An Agency may rebut the presumption of compliance if it determines, based on all relevant
facts and circumstances, that a trading desk is engaging in activity that is not based on the
trading desk’s reasonably expected near-term demands of clients, customers or
counterparties by providing written notice of such a determination to the banking entity.65
Compliance program requirement limited to banking entities with significant trading
assets and liabilities. The Proposed Rule would amend the compliance program requirement66
for the exemption for permitted underwriting activities (which, under the 2013 Rule, applies to all
banking entities relying on the exemption) by making that requirement applicable only to banking
entities with significant trading assets and liabilities.67
The Agencies clarify that banking entities that do not have significant trading assets and
liabilities are not relieved of the obligation to comply with the other requirements of the
exemption for underwriting activities, but the elimination of the exemption’s compliance
program requirement for such banking entities is intended to provide these banking entities
with “an appropriate amount of flexibility to tailor the means by which they seek to ensure
compliance with the underlying requirements of the exemption for underwriting activities, and
to allow them to structure their internal compliance measures in a way that takes into account
the risk profile and underwriting activity of the particular trading desk.”68
II.A.4. Market making-related activities
The 2013 Rule includes an exemption for a banking entity’s market making-related activities, which is
statutorily designated as a permitted activity under the Volcker Rule,69
subject to the following conditions
(among others):70
(1) The trading desk that establishes and manages the “financial exposure”71
must routinely
stand ready to purchase and sell one or more types of financial instruments related to its
financial exposure and be willing and available to quote, purchase and sell or otherwise
enter into long and short positions in, those types of financial instruments for its own
account, in commercially reasonable amounts and throughout market cycles on a basis
appropriate for the liquidity, maturity and depth of the market for the relevant types of
financial instruments.
(2) The amount, types and risks of the financial instruments in the trading desk’s “market-
maker inventory”72
must be designed not to exceed, on an ongoing basis, the
-17- Volcker Rule June 5, 2018
reasonably expected near-term demands of “clients, customers or counterparties,”73
based on (i) the liquidity, maturity and depth of the market for the relevant types of
financial instruments and (ii) demonstrable analysis of historical customer demand,
current inventory of financial instruments and market and other factors regarding the
amount, types and risks of or associated with financial instruments in which the trading
desk makes a market, including through block trades.
(3) The banking entity must establish, implement, maintain and enforce an internal
compliance program meeting specified requirements with respect to market making-
related activity.
(4) The compensation arrangements of persons performing the banking entity’s market
making-related activities must be designed not to reward or incentivize prohibited
proprietary trading.
(5) The banking entity must be licensed or registered to engage in market making-related
activity if and to the extent required by applicable law.
The Agencies retain a number of these conditions in the Proposed Rule, but also propose changes that
are intended to “tailor, streamline, and clarify the requirements that a banking entity must satisfy to avail
itself of the market making exemption.”74
In explaining these changes, the Agencies note that their
original rulemaking in connection with the 2013 Rule sought to balance two goals: “to allow market
making to take place, which is important to well-functioning and liquid markets as well as the economy,
and simultaneously to prohibit proprietary trading unrelated to market making or other permitted
activities.”75
The Agencies go on to acknowledge that, based on their experience with the 2013 Rule, they
believe that “the significant compliance requirements and lack of clear bright lines in the regulation may
unnecessarily constrain market making” and “some of the requirements are unnecessary to prevent the
type of trading activities that the rule was designed to prohibit.”76
Accordingly, the Agencies propose to revise the exemption for market making-related activities in a
manner that parallels the proposed amendments to the underwriting exemption discussed in Part II.A.3
above. Specifically, the Proposed Rule establishes a presumption that a banking entity’s purchase or sale
of a financial instrument meets the RENTD requirement of the market making-related activities exemption
if the banking entity has established and implements, maintains and enforces the applicable “internally set
limits” for the trading desk on (i) the amount, types and risks of the trading desk’s market-maker positions;
(ii) the amount, types and risks of the products, instruments and exposures the trading desk may use for
risk management purposes; (iii) the level of exposures to relevant risk factors arising from its financial
exposure; and (iv) the period of time a financial instrument may be held,77
subject to (A) a requirement to
report breaches or increases of the limits to the relevant Agency,78
(B) review and oversight by the
relevant Agency79
and (C) the possibility of a rebuttal of the presumption by the relevant Agency.80
The
Proposed Rule would also amend the compliance program requirement for the exemption for permitted
market making-related activities (which, under the 2013 Rule, applies to all banking entities relying on the
-18- Volcker Rule June 5, 2018
exemption) by making that requirement applicable only to banking entities with significant trading assets
and liabilities, similar to the amendment to the corresponding provision of the underwriting exemption.81
II.A.5. Risk-mitigating hedging activities
The Proposed Rule modifies the 2013 Rule’s exemption for permitted risk-mitigating hedging activities by
streamlining the requirements for a banking entity to rely upon this exemption in several respects.82
Under the 2013 Rule, the prohibition on proprietary trading does not apply to the risk-mitigating hedging
activities of a banking entity in connection with and related to individual or aggregated positions, contracts
or other holdings of the banking entity and designed to reduce the specific risks to the banking entity in
connection with and related to such positions, contracts or other holdings, provided that the activity
satisfies certain compliance requirements related to monitoring, analysis and documentation.83
The 2013 Rule requires potentially extensive documentation in connection with the exemption for
Narrative Statement. The Proposed Rule includes a new requirement of a Narrative Statement
that must: (i) describe any changes in calculation methods used for quantitative measures and
indicate when such changes occurred; (ii) be prepared and submitted periodically and when there
are any changes in the banking entity’s trading desk structure or strategies;164
(iii) report any
other information the banking entity views as relevant for assessing the information schedules or
quantitative measures; (iv) explain the banking entity’s inability to report a particular quantitative
measurement; and (v) provide notice if a trading desk changes its approach to including or
excluding products that are not financial instruments in its metrics.165
-30- Volcker Rule June 5, 2018
III. ADDITIONAL AREAS IDENTIFIED FOR COMMENT BY AGENCIES
In the Preamble, the Agencies pose 342 numbered questions for public comment, many of which consist
of multiple sub-questions, relating to specific aspects of the Proposed Rule. The Agencies’ questions
highlight a number of issues that are not addressed through any specific amendment in the Proposed
Rule, but which have been the subject of extensive public comment. In many cases, the Agencies’
questions appear to be designed to inform the Agencies’ consideration of further potential revisions to
significant elements of the Proposed Rule. Accordingly, the ultimate scope and contour of many
significant aspects of the Volcker Rule remain open questions and should be influenced by the comment
process that will follow publication of the NPR.
The below table provides a high-level, non-comprehensive overview of certain topics that the Agencies
identify for comment and a summary of selected questions they pose on each such topic.
Topic Areas Identified for Comment and Questions Posed
Overall Framework and Categorization of Banking Entities
Rulemaking
framework and
Agency coordination
Means to improve the transparency of the Agencies’ implementation of the Volcker Rule.
Steps that could be taken with respect to interagency coordination to make compliance with the Volcker Rule more efficient and to promote the safety and soundness of banking entities and U.S. financial stability.
166
Economic impact
and compliance
costs
Whether certain proposals would meaningfully reduce compliance costs. The specific proposals with respect to which the Agencies pose this question include:
establishing a presumption of compliance for banking entities with limited trading assets and liabilities;
changes to the “trading account” definition;
the use of internally set risk limits to meet the RENTD requirements of the underwriting and market making-related activities exemptions;
changes to streamline the conditions of the risk-mitigating hedging exemption and the TOTUS exemption; and
changes to the metrics reporting requirements and to the compliance program requirements.
167
-31- Volcker Rule June 5, 2018
Topic Areas Identified for Comment and Questions Posed
Banking entity
categorization and
tailoring
Appropriateness of establishing different requirements for banking entities based on thresholds of trading assets and liabilities.
Appropriateness of the specific thresholds that are proposed to delineate between the three categories of banking entities and the requirements that would apply to each category.
Potential to further tailor application of the regulations by categorizing certain banking entities separately from their subsidiaries and affiliates (e.g., an SEC-registered broker-dealer that operates separately and independently from an affiliate with significant trading assets and liabilities).
168
Proprietary Trading Provisions
Definition of “trading
account”
Appropriateness of replacing the short-term intent prong with the proposed accounting prong, “considering the fact that entities may have discretion over whether certain financial instruments are recorded at fair value.”
169
Appropriateness of the scope of financial instruments proposed to be included in the accounting prong.
Costs of compliance with the dealer prong of the “trading account” definition.
170
Presumption of
compliance with
proprietary trading
prohibition
Appropriateness of the proposed desk-level profit and loss threshold for presumed compliance with the prohibition on proprietary trading.
Appropriateness of the process by which banking entities would notify the appropriate Agency of instances when the threshold is crossed.
Appropriateness of the process by which the Agencies may rebut the presumption of compliance.
171
Implications for
banking entities
regulated by market
regulators
Potential differences in the Proposed Rule’s implications for banking entities regulated by market regulators as compared to other banking entities, including with respect to:
the proposal to replace the short-term intent prong with an accounting prong, including the presumption of compliance;
notice and response procedures, including the requirement that banking entities relying on the presumption of compliance must notify the Agencies of instances when the absolute daily profit and loss threshold has been exceeded; and
costs of compliance.172
Definition of “trading
desk”
Potential consequences of a change to the definition of “trading desk,” including with respect to the ability of banking entities and the Agencies to detect impermissible proprietary trading.
173
Whether it would be appropriate to adopt a potential multi-factor definition of “trading desk” that would be based on the same criteria typically used to establish trading desks for other operational, management and
-32- Volcker Rule June 5, 2018
Topic Areas Identified for Comment and Questions Posed
compliance purposes. This definition would be:
structured to establish efficient trading for a market sector;
organized to ensure appropriate setting, monitoring and management review of the desk’s trading and hedging limits, current and potential future loss exposures, strategies and compensation incentives; and
characterized by a clearly-defined unit of personnel that typically: (a) engages in coordinated trading activity with a unified approach to its key elements; (b) operates subject to a common and calibrated set of risk metrics, risk levels and joint trading limits; (c) submits compliance reports and other information as a unit for monitoring by management; and (d) books its trades together.
174
Reservation of
authority
Appropriateness of the reservation of authority to allow the appropriate Agency, rather than the Agencies jointly, to determine whether a particular activity is proprietary trading, and the process for the foregoing determination.
175
Underwriting
exemption – RENTD
limits and
presumption of
compliance
Effects of the proposed presumption of compliance for underwriting activity within internally set risk limits, including:
how it would impact capital formation and liquidity of particular markets;
whether further guidance on how to set internal risk limits is necessary;
whether it is appropriately tailored to the underwriting market; and
the process by which the Agencies may rebut the presumption.176
Underwriting
exemption –
Compliance program
and other
requirements
Whether compliance requirements for the underwriting activities exemption should only apply to banking entities with significant trading assets and liabilities.
Whether such requirements should be streamlined for such entities.177
Market making-
related activities
exemption – RENTD
limits and
presumption of
compliance
Effects of the proposed presumption of compliance for market making-related activities within internally set risk limits, including:
how it would impact the liquidity of particular markets;
whether further guidance on how to set internal risk limits is necessary;
whether the proposal would present problems for a trading desk that makes a market in derivatives; and
the process by which the Agencies may rebut the presumption.178
-33- Volcker Rule June 5, 2018
Topic Areas Identified for Comment and Questions Posed
Market making-
related activities
exemption –
Compliance program
and other
requirements
Whether compliance requirements for the market making-related activities exemption should only apply to banking entities with significant trading assets and liabilities.
Whether such requirements should be streamlined for such entities.179
Market making-
related activities
exemption – Loan-
related swaps
Circumstances in which loan-related swaps should be permissible under the market making-related activities exemption.
Whether such swaps should be excluded from the definition of “proprietary trading” or made a permissible activity.
Whether trading in other types of swaps should also be addressed.180
Market making-
related activities
exemption – Market
making-related
hedging
Whether the Agencies should clarify the ability of banking entities to engage in market making-related hedging.
Whether current restrictions impede the ability of banking entities to effectively and efficiently engage in such hedging.
How effective the current regulations are at reducing risk.181
Permitted risk-
mitigating hedging
activities
Whether to remove the requirement that a correlation analysis be done to determine whether hedging transactions significantly mitigate specific risks.
How the correlation analysis requirement affects a banking entity’s decisions on whether to enter into different types of hedges and the timing of hedging activities.
Whether exemptions should be provided for hedging activity that is accounted for under accounting principles.
The Agencies also solicit comment on:
reductions in compliance requirements for risk-mitigating hedging activities by banking entities that do not have significant trading assets and liabilities; and
an exclusion from enhanced documentation requirements for trading desks that hedge risks of other desks.
182
Liquidity
management
exclusion
Whether the proposal to modify the liquidity management exclusion to include foreign exchange forwards, foreign exchange swaps, or physically-settled cross-currency swaps sufficiently protects against the possibility of banking entities using the exclusion to conduct impermissible speculative trading.
183
Error trades Whether the proposed exclusion to correct bona fide trade errors:
aligns with banking entities’ existing policies and procedures;
is appropriately calibrated and sufficiently clear; and
-34- Volcker Rule June 5, 2018
Topic Areas Identified for Comment and Questions Posed
does not conflict with the rules of any self-regulatory organization.
184
TOTUS exemption Whether proposed modifications to the TOTUS exemption effectively focus the exemption on the location of the principal actions and risk of the transaction.
Whether these modifications ensure that principal risk remains solely outside the United States.
Whether the proposals raise competitive equity concerns for U.S. banking entities.
185
Covered Fund Provisions
Definition of
“covered fund”
In considering whether to further tailor the 2013 Rule’s general approach to defining the term “covered fund” and the 2013 Rule’s definition of “covered fund” (before applying exclusions), the Agencies solicit comment on:
whether and how to incorporate definitions of “hedge fund” and “private equity fund” into the rule’s definition of “covered fund”;
whether the current definition of “covered fund” is over- or under-inclusive;
whether the definitions of “foreign covered fund” and “commodity pool” effectively address concerns about circumvention of the Volcker Rule;
challenges arising from complying with covered fund restrictions;
costs that would arise from a change in the definition of “covered fund”; and
how proposed modifications to other provisions of the 2013 Rule (e.g., the exemptions for underwriting, market making-related and risk-mitigating hedging activities) may interact with the “covered fund” definition.
186
Alternative
definitional
approaches
Whether an exclusion from the “covered fund” definition should be provided for funds that (i) do not engage in transactions to profit from short-term price movements and (ii) do not invest in illiquid assets.
Whether to revise the base definition of “covered fund” using a characteristics-based approach.
Whether funds that lack certain traits of a hedge fund or private equity fund should be excluded from the definition of “covered fund.” The Agencies note the possibility of leveraging the definitions of “hedge fund” and “private equity fund” from the SEC’s Form PF to determine relevant traits (see below).
187
Hedge fund. Form PF defines “hedge fund” to mean any private fund (other than a securitized asset fund
188): (i) with respect to
-35- Volcker Rule June 5, 2018
Topic Areas Identified for Comment and Questions Posed
which one or more investment advisers (or related persons of investment advisers) may be paid a performance fee or allocation calculated by taking into account unrealized gains (other than a fee or allocation the calculation of which may take into account unrealized gains solely for the purpose of reducing such fee or allocation to reflect net unrealized losses); (ii) that may borrow an amount in excess of one-half of its net asset value (including any committed capital) or may have gross notional exposure in excess of twice its net asset value (including any committed capital) or (iii) that may sell securities or other assets short or enter into similar transactions (other than for the purpose of hedging currency exposure or managing duration).
189
Private equity fund. Form PF defines “private equity fund” not by reference to specific characteristics or traits, but rather as any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund, as those terms are defined in Form PF.
190 In this regard, the Agencies note also that
they understand private equity funds commonly (i) have restricted or limited investor redemption rights; (ii) invest in public and non-public companies through privately negotiated transactions resulting in private ownership of the business; (iii) acquire the unregistered equity or equity-like securities of such companies that are illiquid as there is no public market and third-party valuations are not readily available; (iv) require holding investments long-term; (v) have a limited duration of ten years or less; and (vi) realize returns on investments and distribute the proceeds to investors before the anticipated expiration of the fund’s duration.
191
Exclusions for FPFs
and RICs
Whether the current FPF exclusion captures funds that are sufficiently similar to RICs and excludes those that are insufficiently similar.
Whether the current RIC exclusion is appropriate.
Whether concerns about the use of FPFs to evade the 2013 Rule justify conditions imposed on FPFs but not RICs, or whether the Agencies should address such concerns through, for instance, an anti-evasion provision.
The Agencies also solicit comment on all aspects of the FPF exclusion, including the conditions to the exclusion that:
the fund must be “authorized to offer and sell ownership interests to retail investors in the issuer’s home jurisdiction”;
ownership interests must be sold “predominantly” through “public offerings” outside of the United States; and
ownership interests must be sold predominantly to persons other than the sponsoring banking entity and certain related persons.
Whether previously released FAQ #5, which allows an entity formed and operated pursuant to a written plan to become an FPF to receive the same treatment as an entity formed and operated pursuant to written plans to become a RIC or BDC, should be incorporated into the regulations.
192
-36- Volcker Rule June 5, 2018
Topic Areas Identified for Comment and Questions Posed
Family wealth
management
vehicles
The Agencies solicit information on family wealth management vehicles, including:
what exclusions from the definition of “investment company” in the Investment Company Act they rely on;
whether they should be excluded from the definition of “covered fund” and how such an exclusion would be structured;
whether such an exclusion would create opportunities for evasion of the Volcker Rule;
what services banking entities provide family wealth management vehicles; and
whether there are similar vehicles that pose similar issues.193
Joint ventures Whether the exclusion for joint ventures has allowed banking entities to continue sharing the risk and cost of financing banking activities through joint ventures.
Whether changes should be made to the exclusion to clarify the condition that joint ventures may not be used to raise money from investors primarily for the purpose of trading in securities.
Whether changes should be made to clarify that the joint venture exclusion is designed to allow banking entities to structure business ventures.
How the term “joint venture” should be defined.194
Whether to incorporate in the Proposed Rule some or all the views expressed by the staffs in FAQ #15,
195 which is widely considered to have
limited significantly the utility of this exclusion.
Securitizations How exclusions from the “covered fund” definition for loan securitizations, qualifying asset-backed commercial paper conduits and qualifying covered bonds have worked in practice.
Whether there are any assets that are not “loans” that should be considered permissible assets under the exclusion (including whether the Agencies should consider permitting a loan securitization vehicle to hold 5% to 10% of assets that are considered debt securities rather than “loans”).
Whether the view expressed in FAQ #4 that servicing assets may be any type of asset, provided that any servicing asset that is a security must be a permitted security, should be incorporated into the regulations.
Whether changes should be made to the definition of “ownership interest” in the context of securitizations.
196
Selected other
issuers
Whether exclusions should be extended for entities, such as small business investment companies, that are excluded from the “covered fund” definition but may not be able to satisfy the relevant exclusion as the entity is liquidated.
Whether municipal securities tender option bond vehicles should be
-37- Volcker Rule June 5, 2018
Topic Areas Identified for Comment and Questions Posed
excluded from the definition of “covered fund.”197
Underwriting and
market making for a
covered fund
What effects the proposed changes to these exemptions would have on capital-raising activities of issuers.
How to align the relevant restrictions of these exemptions with those for engaging in underwriting and market making-related activities for other financial instruments.
Whether the Agencies should remove the requirement that the banking entity include for purposes of the per-fund limitation, aggregate funds limitation and capital deduction the value of any ownership interests of the covered fund acquired or retained in accordance with the underwriting or market making-related activities exemptions.
Whether any other restrictions on underwriting or market making of ownership interests in covered funds should be included or removed.
198
SOTUS exemption –
Generally
Whether the Proposed Rule’s implementation of the SOTUS exemption is:
effective;
clear regarding when a transaction or activity will be considered to have occurred solely outside the United States; and
consistent with limiting the extraterritorial reach of the Volcker Rule with respect to FBOs.
Whether the Financing Restriction should be retained.
Whether the proposed changes to the exemption create competitive advantages for foreign banking entities.
Whether the proposal regarding the Marketing Restriction is sufficiently clear.
199
Limitations on
relationships with
certain covered
funds (Super 23A) –
Scope and
exemptions
Whether other transactions between banking entities and covered funds should be prohibited or limited.
Whether the exemptions under Section 23A of the Federal Reserve Act and Regulation W should be incorporated into the regulations.
200
Whether to incorporate the quantitative limits in Section 23A of the Federal Reserve Act and Regulation W.
201
Limitations on
relationships with
certain covered
funds (Super 23A) –
FCM activities
Whether clearing services provided by a futures commission merchant (“FCM”) to its customers are a relationship that would raise policy concerns.
Whether the no-action relief provided by the CFTC staff to an FCM on March 29, 2017 and the non-objection of the other Agencies to this relief provides sufficient certainty for market participants.
202
-38- Volcker Rule June 5, 2018
Topic Areas Identified for Comment and Questions Posed
Compliance Program; Violations
Requirements for
banking entities with
significant trading
assets and liabilities
Whether the six-pillar compliance program requirements should apply only to banking entities with significant trading assets and liabilities and whether the scope of the six-pillar compliance program is appropriate.
203
Requirements for
banking entities with
limited trading
assets and liabilities
Whether to specify notice and response procedures in connection with an Agency determination that the presumption of compliance for banking entities with limited trading assets and liabilities is rebutted.
204
Tailoring of
compliance
programs generally
Whether the proposal to tailor compliance programs based on the type, size, scope and complexity of a banking entity’s activities and business structure would be effective in ensuring that banking entities with significant or moderate trading assets and liabilities comply with the proprietary trading and covered fund requirements and restrictions of the Volcker Rule.
To what extent compliance programs are implemented by registered investment advisers as opposed to other banking entity affiliates or subsidiaries.
205
CEO attestation
requirement
The Agencies solicit comment on the CEO attestation requirement, including with respect to:
its cost;
whether such attestation is redundant in light of existing business practices;
whether the scope of the requirement under the proposed three-tier scheme for banking entities is appropriate; and
whether incorporating the CEO attestation requirement would ensure that a strong governance framework is implemented with respect to compliance with the Volcker Rule.
206
Independent testing,
training and
recordkeeping
requirements
Whether the current independent testing, training and recordkeeping requirements would, if appropriately tailored to the size, scope and complexity of the banking entity’s activities, be effective in ensuring that banking entities with significant or moderate trading assets and liabilities comply with the Volcker Rule.
207
Reporting and
recordkeeping
requirements
Whether certain proposed definitions (i.e., “applicability,” “trading day” and “covered trading activity”) are effective and clear and whether any other terms should be defined.
208
-39- Volcker Rule June 5, 2018
Topic Areas Identified for Comment and Questions Posed
Quantitative Metrics Reporting and Recordkeeping
Overall assessment
of metrics reporting
requirement
Whether the quantitative metrics regime is an appropriate approach to identifying potentially prohibited proprietary trading.
The costs of reporting quantitative measurements and proposed qualitative reporting requirements.
Whether a trading desk should be permitted not to furnish a quantitative measurement in certain circumstances, or be required to report activity conducted under different exemptions separately.
Whether quantitative measures should be made public in some form.209
Nature and scope of
information
reporting
The Agencies solicit comment on the proposed Trading Desk Information and Quantitative Measurements Identifying Information and the proposed Narrative Statement requirement, including:
whether such proposals are sufficiently clear;
whether such information would be helpful in understanding a trading desk’s covered trading activities and associated risks; and
the costs of preparing such information.210
Frequency and
method of required
calculation and
reporting
Whether the proposed frequency of reporting the Trading Desk Information, Quantitative Measurements Identifying Information and the Narrative Statement is appropriate and effective (specifically, with respect to the proposal to adjust the reporting schedule for banking entities with $50 billion or more in trading assets and liabilities to within 20 days of the end of each calendar month).
Whether implementing the proposed Appendix’s electronic reporting requirement and XML Schema, as well as certain record retention requirements, would be practical or appropriate.
211
Stressed Value-at-
Risk metric
Whether Stressed Value-at-Risk limits should be removed as a reporting requirement for desks engaged in permitted market making-related activity or risk-mitigating hedging activity.
Whether banking entities should be required to report the limit size of both the upper and lower bound of a limit.
212
Comprehensive
Profit and Loss
Attribution metric
Whether to clarify that Residual Profit and Loss is only profit and loss that cannot be attributed to existing or new positions, and to add a separate reporting item for Unexplained Profit and Loss from Existing Position.
How best to specify the calculation for Profit and Loss due to Risk Factor Changes (including, for example, aligning the calculation with “hypothetical” or “Clean P&L” as prescribed by the market risk capital rules; or clarifying the definition to be the sum of all profit and loss attributions regardless of whether they are reported individually).
213
-40- Volcker Rule June 5, 2018
Topic Areas Identified for Comment and Questions Posed
Inventory Turnover
metric
Whether the Inventory Turnover metric should be removed or replaced.
Whether the proposed Positions metric would be effective in helping distinguish between permitted and prohibited trading activities (including with respect to the identification of high-risk strategies and the evaluation of underwriting and market making-related activities).
214
Customer-Facing
Trade Ratio metric
Whether the Customer-Facing Trade Ratio metric should be removed or replaced.
Whether the proposed Transaction Volumes metric would be effective in helping to distinguish between permitted and prohibited trading activities (including with respect to the evaluation of underwriting and market making-related activities).
Whether detailed instructions are needed regarding how different transaction life cycle events such as amendments, novations, compressions, maturations, allocations, unwinds, terminations, option exercises, option expirations and partial amendments affect the calculation of Transaction Volumes and the Comprehensive Profit and Loss Attribution.
215
Securities Inventory
Aging metric
Whether the proposed Securities Inventory Aging metric is effective in evaluating underwriting or market making-related activity.
Whether inventory aging of derivatives and/or futures is a useful metric for monitoring covered trading activity at trading desks.
216
* * *
ENDNOTES
1 The Agencies are the Federal Reserve, the Office of the Comptroller of the Currency (the “OCC”),
the Federal Deposit Insurance Corporation (the “FDIC”), the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”). As of the time of publication of this Memorandum, the SEC has yet to take action to approve the NPR, but is scheduled to do so on the date hereof. The Governors of the Federal Reserve and the members of the Board of Directors of the FDIC voted unanimously to approve the NPR at their respective meetings, and Comptroller Joseph Otting stated during the meeting of the Board of Directors of the FDIC that he approved the NPR on behalf of the OCC. At the vote of the CFTC approving the NPR, Commissioner Rostin Behnam dissented from the other two Commissioners.
2 It is expected that the version of the NPR approved by each Agency and related materials
released to the public in connection with each Agency’s approval of its version of the NPR will be posted by each Agency on its website. As of the time of publication of this Memorandum, materials released by the Federal Reserve are available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180530a.htm and those of the FDIC are available at https://www.fdic.gov/regulations/reform/volcker/rule.html.
3 Preamble at 16 n.19 (citing statements by Randal K. Quarles, Vice Chair, Federal Reserve;
Daniel K. Tarullo, Former Governor, Federal Reserve; and Martin J. Gruenberg, Former Chair, FDIC). Commentaries from various regulators and policymakers have highlighted concerns with the 2013 Rule’s complexity and compliance burden. See, e.g., Janet L. Yellen, Former Chair, Federal Reserve: “[I]mplementation of [the Volcker Rule] is frankly complex, and I’m certainly open to looking at ways to reduce regulatory burden in that area.” FOMC Press Conference (June 14, 2017), available at https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20170614.pdf; Daniel K. Tarullo, Former Governor, Federal Reserve: “[S]everal years of experience have convinced me that there is merit in the contention of many firms that, as it has been drafted and implemented, the Volcker rule is too complicated.” Departing Thoughts (Apr. 4, 2017), available at https://www.federalreserve.gov/newsevents/speech/tarullo20170404a.htm; Keith A. Noreika, Former Acting Comptroller of the Currency: “I have sought the views of my colleagues at the other federal banking agencies about simplifying the regulatory framework implementing the Volcker Rule. In recent years, many of the nation’s financial institutions have struggled to understand and comply with these regulations, devoting significant resources that could have been put to more productive uses. There is near unanimous agreement that this framework needs to be simplified and clarified.” Fostering Economic Growth: Regulator Perspective: Hearing Before the Senate Banking Committee (June 22, 2017), available at https://www.banking.senate.gov/imo/media/doc/Noreika%20Testimony%206-22-17.pdf.
4 U.S. Department of the Treasury, A Financial System That Creates Economic Opportunities:
Banks and Credit Unions (June 12, 2017), available at https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf. Pages 71–78 of the Treasury Report discuss the Volcker Rule. For an overview of the Treasury Report, please see our Client Memorandum, Treasury Issues Comprehensive Report on Depository System Regulatory Reforms, dated June 14, 2017, available at https://www.sullcrom.com/siteFiles/Publications/SC_Publication_Treasury_Issues_Comprehensive_Report_on_Depository_System_Regulatory_Reforms.pdf.
5 OCC, Proprietary Trading and Certain Interests in and Relationships With Covered Funds
(Volcker Rule); Request for Public Input, 82 Fed. Reg. 36692 (Aug. 7, 2017). For a discussion of the OCC RFI, please see our Client Memorandum, Volcker Rule: Comptroller of the Currency Releases Request for Information on the Volcker Rule’s Implementation, Application and Administration, dated August 3, 2017, available at https://www.sullcrom.com/volcker-rule-comptroller-of-the-currency-releases-request-for-information-on-the-volcker-rules-implementation-application-and-administration.
6 The NPR indicates that the Agencies expect to conduct a separate rulemaking process to
address the Reform Act’s amendments that affect the Volcker Rule. Preamble at 12. The Reform Act’s two-part test for exemption from the Volcker Rule is summarized in Part I of this Memorandum.
7 Public comment letters responding to the OCC RFI, including 87 unique comment letters, are
available at https://www.regulations.gov/docket?D=OCC-2017-0014. A summary of the comment letters is available at https://occ.gov/topics/capital-markets/financial-markets/trading-volcker-rule/volcker-notice-comment-summary.pdf.
8 OCC, Federal Reserve, FDIC and SEC, Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 79 Fed. Reg. 5535 (Jan. 31, 2014); CFTC, Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 79 Fed. Reg. 5807 (Jan. 31, 2014). Each Agency adopted the 2013 Rule and codified it separately in its respective regulations. See 12 C.F.R. §§ 248 (Federal Reserve); 44 (OCC); 351 (FDIC); and 17
C.F.R. §§ 255 (SEC); 75 (CFTC). References and citations herein to the 2013 Rule are to the common rule text.
9 For a discussion of the requirements of the 2013 Rule, please see our Client Memorandum,
Volcker Rule: U.S. Agencies Approve Final Volcker Rule, Detailing Prohibitions and Compliance Regimes Applicable to Banking Entities Worldwide, dated January 27, 2014, available at https://www.sullcrom.com/Volcker-Rule-01-27-2014.
10 The Agencies issued on January 10, 2014 an “interim final rule” to provide relief with respect to
banking entities’ legacy interests in so-called “TruPS-backed CDOs.” This interim final rule does not technically amend the 2013 Rule, but rather operates as a “companion rule” to the 2013 Rule. For further discussion of this interim final rule, please see our Client Memorandum, Volcker Rule: Agencies Issue Interim Final Rule Exempting Certain TruPS-Backed CDOs from the Volcker Rule’s Prohibition on Banking Entities’ Holding Ownership Interests in or Sponsoring Covered Funds, dated January 14, 2014, available at https://www.sullcrom.com/Volcker-Rule.
11 The staff of each Agency has released its respective version of each FAQ in substantively
identical form. The FAQs issued to date by the staff of each Agency apply to banking entities over which that Agency has jurisdiction under the Volcker Rule. The FAQs, as prepared by the staff of each Agency and updated from time to time, can be accessed at the public website of each Agency: Federal Reserve (http://www.federalreserve.gov/bankinforeg/volcker-rule/faq.html); FDIC (https://www.fdic.gov/regulations/reform/volcker/faq.html); OCC (https://occ.gov/topics/capital-markets/financial-markets/trading-volcker-rule/volcker-rule-implementation-faqs.html); SEC (https://www.sec.gov/divisions/marketreg/faq-volcker-rule-section13.htm); CFTC (https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_28_VolckerRule/index.htm).
12 Of particular note are the federal banking agencies’ policy statement regarding the treatment of
foreign excluded funds (as discussed in our Client Memorandum, Volcker Rule: Federal Banking Agencies Release New Guidance on the Treatment of “Foreign Excluded Funds” Under the Volcker Rule, dated July 22, 2017, available at https://www.sullcrom.com/volcker-rule-federal-banking-agencies-release-new-guidance-on-the-treatment-of-foreign-excluded-funds-under-the-volcker-rule) and the Agencies’ guidance regarding the capital treatment of certain ownership interests in covered funds (as discussed in our Client Memorandum, Volcker Rule and Bank Capital: Agencies Release Guidance on Capital Treatment of Banking Entity Investments in TruPS CDOs, dated March 4, 2016, available at https://www.sullcrom.com/volcker-rule-and-bank-capital-agencies-release-guidance-on-capital-treatment-of-banking-entity-investments-in-trups-cdos).
13 OCC RFI at 36693. See also supra note 3.
14 Preamble at 17.
15 Preamble at 17–18.
16 See infra note 25 (discussing the 2013 Rule’s five tiers of compliance program requirements).
17 See text accompanying infra note 30 (noting that the Proposed Rule includes a reservation of
authority that would allow an Agency to require a banking entity with limited or moderate trading assets and liabilities to apply any of the more extensive requirements that would otherwise apply if the banking entity had significant or moderate trading assets and liabilities under certain circumstances).
18 For a discussion of the Reform Act, please see our Client Memorandum, Financial Services
Regulatory Reform Legislation: “Economic Growth, Regulatory Relief, and Consumer Protection
Act” is Enacted, dated May 24, 2018, available at https://www.sullcrom.com/financial-services-regulatory-reform-legislation-economic-growth-regulatory-relief-and-consumer-protection-act-is-enacted. See Part II.B.5 of this Memorandum for a discussion regarding the amendment to the name sharing restriction.
19 Preamble at 12.
20 Treasury Report at 77.
21 See supra note 7.
22 OCC RFI at 36694 n.16.
23 In her statement in connection with the Federal Reserve’s approval of the NPR, Governor Lael
Brainard observed that the “requirement of CEO attestation is critical” to the revision of the RENTD framework. Lael Brainard, Governor, Federal Reserve, Statement on the Volcker Rule Proposal, May 30, 2018, available at https://www.federalreserve.gov/newsevents/pressreleases/brainard-statement-20180530.htm. The Preamble underscores this point with respect to the compliance program-related proposals more broadly, noting that the Proposed Rule’s simplification of the compliance program requirements “should be balanced against the requirement for all banking entities to maintain compliance with [the Volcker Rule] and the implementing regulations. Accordingly, the Agencies believe that applying the CEO attestation requirement for banking entities with meaningful trading activities would ensure that the compliance programs . . . are reasonably designed to achieve compliance with [the Volcker Rule] and the implementing regulations as proposed.” Preamble at 218.
24 See infra note 30 (discussing the Agencies’ “reserved authority”).
25 The 2013 Rule’s five tiers of compliance program requirements are as follows. For further detail
regarding the specific requirements associated with each of these tiers, please see Section 10 of our Client Memorandum, Volcker Rule: U.S. Agencies Approve Final Volcker Rule, Detailing Prohibitions and Compliance Regimes Applicable to Banking Entities Worldwide, dated January 27, 2014, available at https://www.sullcrom.com/Volcker-Rule-01-27-2014/.
(1) Banking entities that engage in no restricted activities ( i.e., proprietary trading (other than permitted trading in U.S. government obligations) or covered fund-related activities or investments) are not subject to a compliance program requirement.
(2) Smaller banking entities with total consolidated assets of $10 billion or less as reported on December 31 of the previous two calendar years that engage in restricted activities are subject to a reduced compliance burden, which requires only that such banking entities include in their existing compliance policies and procedures appropriate references to the requirements of the Volcker Rule.
(3) Banking entities that engage in restricted activities and do not fall into any of the other four tiers are required to implement and maintain a compliance program that meets several baseline requirements, commonly referred to as the “standard” compliance program.
(4) Larger banking entities and banking entities with significant trading activities a re subject to “enhanced” compliance program requirements, which adds to the standard program additional and more detailed policies and procedures, internal controls, independent testing and other requirements, as well as an annual CEO certification requirement. This tier applies to banking entities with (A) total consolidated assets of $50 billion or more as of the previous calendar year-end, as calculated on the basis of
(i) all affiliates and subsidiaries globally, in the case of U.S. banking entities, and (ii) consolidated U.S. operations only, in the case of foreign banking entities; and/or (B) total “trading assets and liabilities,” together with affiliates and subsidiaries, but excluding trading assets and liabilities involving U.S. government obligations, the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four prior calendar quarters, equals or exceeds $10 billion, as calculated with respect to U.S. banking entities and foreign bank ing entities in the manner described in the foregoing clauses (A)(i) and (ii).
(5) Banking entities with significant trading activities are subject to the “enhanced” compliance program requirements as well as a requirement to calculate and report quantitative trading metrics.
26 Proposed Rule §§ ._2(ff)(2)–(3). See also Preamble at 21–22. Pages 5–6 of Appendix A of this
Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
27 Preamble at 12.
28 The additional documentation requirements for covered funds under § _.20(e) of the 2013 Rule,
which apply unchanged to banking entities with significant trading assets and liabilities under the Proposed Rule, include:
(1) documentation of the exclusions or exemptions other than Section 3(c)(1) or 3(c)(7) of the 1940 Act relied on by each fund sponsored by the banking entity (including all subsidiaries and affiliates) in determining that the fund is not a covered fund;
(2) for each fund sponsored by the banking entity (including all subsidiaries and affiliates) for which the banking entity relies on one or more of the exclusions from the definition of “covered fund” for foreign public funds, foreign pension or retirement funds, loan securitizations, qualifying asset-based commercial paper conduits or qualifying covered bonds, documentation supporting the banking entity’s determination that the fund is not a covered fund;
(3) for each seeding vehicle that will become a RIC or an SEC-regulated BDC, a written plan documenting: the banking entity’s determination that the seeding vehicle will become such a RIC or BDC, the period of time during which the vehicle will operate as a seeding vehicle and the banking entity’s plan to market the vehicle to third-party investors and convert it into a RIC or BDC within the time period required under the 2013 Rule; and
(4) for any banking entity that is, or is controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or of any U.S. state, if the aggregate amount of ownership interests in foreign public funds owned by such banking entity (including ownership interests owned by any affiliate that is controlled directly or indirectly by a banking entity that is located in or organized under the laws of the United States or of any U.S. state) exceeds $50 million at the end of two or more consecutive calendar quarters, beginning with the next succeeding calendar quarter, documentation of the value of the ownership interests owned by the banking entity (and such affiliates) in each foreign public fund and each jurisdiction in which any such foreign public fund is organized, calculated as of the end of each calendar
-45- Volcker Rule June 5, 2018
ENDNOTES (CONTINUED)
quarter, which documentation must continue until the banking entity’s aggregate amount of ownership interests in foreign public funds is below $50 million for two consecutive calendar quarters.
Proposed Rule § _.20(e). See also Preamble at 220–21. Pages 49–50 of Appendix A of this Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
29 Preamble at 34–35.
30 The Proposed Rule also includes a reservation of authority that would allow an Agency to
require a banking entity with limited or moderate trading assets and liabilities to apply any of the more extensive requirements that would otherwise apply if the banking entity had significant or moderate trading assets and liabilities. Proposed Rule at § ._20(h). See also Preamble at 22–23. Page 51 of Appendix A of this Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
31 See supra note 30.
32 Banking entities with limited trading assets and liabilities have no affirmative obligation to
demonstrate compliance with the Proposed Rule on an ongoing basis. However, if upon examination or audit, the relevant Agency determines that the banking entity has engaged in covered activities, such Agency may rebut the presumption of compliance and require the banking entity to demonstrate compliance with the requirements of the rule applicable to a banking entity with moderate trading assets and liabilities. Proposed Rule § _.20(g). See also Preamble at 222.
33 The “short-term intent prong” includes within the definition of trading account any account used by
a banking entity to purchase or sell one or more financial instruments principally for the purpose of: (i) short-term resale; (ii) benefitting from short-term price movements; (iii) realizing short-term arbitrage profits; or (iv) hedging any of the foregoing. 2013 Rule § _.3(b)(1)(i).
34 2013 Rule § _.3(b)(1)(ii).
35 2013 Rule § _.3(b)(1)(iii).
36 The Preamble explained the removal of the short-term intent prong is meant to address concerns
that the prong requires banking entities and the Agencies to make subjective determinations with respect to each trade a banking entity conducts, and that the 60-day rebuttable presumption may scope in activities that do not involve the types of risks or transactions the statutory definition of proprietary trading appears to have been intended to cover. Preamble at 58–59.
37 Proposed Rule § _.3(b). See also Preamble at 24–25. Pages 6–8 of Appendix A of this
Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
38 Proposed Rule § _.3(b)(1)(i). See also Preamble at 59. Pages 6–7 of Appendix A of this
Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
39 Proposed Rule § _.3(b)(1)(ii). See also Preamble at 59. Pages 6–7 of Appendix A of this
Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
40 Proposed Rule § _3(b)(2). See also Preamble at 59. Page 7 of Appendix A of this Memorandum
contains the changes made to this provision as between the 2013 Rule and the Proposed Rule. The Agencies note that they are proposing to retain the “market risk capital prong” and the
-46- Volcker Rule June 5, 2018
ENDNOTES (CONTINUED)
“dealer prong” because “both prongs provide clear lines and well -understood standards for purposes of determining whether or not a purchase or sale of a financial instrument is in the trading account.” Preamble at 60.
41 Proposed Rule § _.3(b)(3). See also Preamble at 61. Pages 7–8 of Appendix A of this
Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule. For this purpose, “applicable accounting standards” means U.S. generally accepted accounting principles, or such other accounting standards applicable to a banking entity that the relevant Agency determines are appropriate and that the banking entity uses in the ordinary course of its business in preparing its consolidated financial statements. Proposed Rule § _.2(b). See also Preamble at 26 n.34. Page 2 of Appendix A of this Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
42 As discussed further in Part II.A.2 of this Memorandum, the Proposed Rule does not change the
definition of “trading desk” from the 2013 Rule. However, the Agencies’ solicitation of comments regarding alternatives to the current definition suggests that the Agencies are considering revisions to this definition.
43 Proposed Rule § _.3(c). See also Preamble at 68. Pages 7–8 of Appendix A of this Memorandum
contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
44 Preamble at 26. The Agencies clarify that, “if the positions of a trading desk have recently
significantly contributed to the financial position of the banking entity, such that the absolute P&L-based threshold is exceeded, the proposed trading-desk-level presumption would become unavailable and the banking entity would be required to comply with more extensive requirements of the rule to ensure compliance.” Preamble at 68. A banking entity may choose to demonstrate ongoing compliance for activity captured by the accounting prong rather than calculating the profit and loss measurement for presumed compliance described above and relying on the presumption of compliance. Preamble at 67.
45 Preamble at 70 n.71.
46 Proposed Rule § _.3(c)(3)(i). See also Preamble at 71. Page 8 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
47 Proposed Rule § _.3(g)(1). See also Preamble at 71–72. Page 12 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
48 Preamble at 67.
49 Preamble at 61–62.
50 Preamble at 81. See also 2013 Rule §§ _.4(a)(2);_.4(b)(2).
56 For purposes of the 2013 Rule, an “underwriting position” is the set of long or short positions in
one or more securities held by a banking entity or its affiliate, and managed by a particular trading desk, in connection with a particular distribution of securities for which the banking
-47- Volcker Rule June 5, 2018
ENDNOTES (CONTINUED)
entity or an affiliate is acting as an underwriter. 2013 Rule § _.4(a)(6). A “distribution” includes an offering of securities: (i) whether or not subject to registration under the Securities Act, that is distinguished from ordinary trading transactions by the presence of special selling efforts and methods; or (ii) made pursuant to an effective registration statement under the Securities Act. 2013 Rule § _.4(a)(3). An “underwriter” is either: (i) a person who has an agreement with an issuer or selling security holder to purchase securities for distribution or to otherwise engage in or manage a distribution for or on behalf of the issuer or selling security holder; or (ii) a person who has agreed to participate or is participating in a distribution of such securities for or on behalf of the issuer or selling security holder. 2013 Rule § _.4(a)(4).
57 Preamble at 90.
58 Preamble at 90.
59 Proposed Rule §§ _.4(a)(8)(i)(A); _.4(a)(8)(i)(B)(1)–(3). See also Preamble at 93. Pages 14–15 of
Appendix A of this Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
60 Preamble at 27.
61 Preamble at 93–94.
62 Proposed Rule § _.4(a)(8)(ii). See also Preamble at 94. Page 15 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
63 Proposed Rule § _.4(a)(8)(iii). See also Preamble at 94. Page 15 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
64 Preamble at 95.
65 Proposed Rule § _.4(a)(8)(iv). See also Preamble at 95. Page 15 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
66 2013 Rule § _.4(a)(2)(iii).
67 Proposed Rule § _.4(a)(2)(iii). See also Preamble at 100. Page 13 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
68 Preamble at 101.
69 BHC Act §13(d)(1)(B).
70 2013 Rule § _.4(b).
71 The 2013 Rule defines “financial exposure” to mean the aggregate risks of one or more
financial instruments and any associated loans, commodities or foreign exchange or currency held by a banking entity or its affiliate and managed by a particular trading desk as part of the trading desk’s market making-related activities. 2013 Rule § _.4(b)(4).
72 The 2013 Rule defines “market-maker inventory” to mean all the positions in the financial
instruments for which the trading desk stands ready to make a market that are managed by the trading desk, including the trading desk’s open positions or exposures arising from open transactions. 2013 Rule § _.4(b)(5).
-48- Volcker Rule June 5, 2018
ENDNOTES (CONTINUED)
73
The 2013 Rule defines “clients, customers and counterparties” for purposes of the market making-related activities exemption to mean “market participants that make use of the banking entity’s market making-related services by obtaining such services, responding to quotations, or entering into a continuing relationship with respect to such services.” 2013 Rule § _.4(b)(3). A trading desk or other organizat ional unit of a second entity is not a “client, customer or counterparty” of a trading desk of the first entity, however, if the second entity has $50 billion or more in total trading assets and liabilities (as measured for purposes of the 2013 Rule’s quantitative trading metrics reporting requirements), unless: (i) the first trading desk documents how and why the second trading desk should be treated as a “client, customer, or counterparty” of the trading desk or (ii) the purchase or sale is conducted anonymously on an exchange or similar trading facility that permits trading on behalf of a broad range of market participants. 2013 Rule § _.4(b)(3)(i). The Proposed Rule does not change this definition other than by noting that the $50 billion trading assets and liabilities threshold referred to above should be calculated based on the same methodology that is used to determine whether a banking entity has “significant trading assets and liabilities.”
74 Preamble at 105.
75 Preamble at 104.
76 Preamble at 104–05.
77 Proposed Rule § _.4(b)(6)(i)(B). See also Preamble at 108. Page 17 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule. As with the presumption of compliance with the underwriting exemption’s RENTD requirement, the Agencies indicate that they expect a banking entity to establish the requisite limits “according to its own internal analyses and processes around conducting its market making activities,” which should include an “ongoing and internal assessment” of RENTD. Preamble at 109–10.
78 Proposed Rule § _.4(b)(6)(iii). See also Preamble at 109. Page 17 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule. The Agencies indicate that they would expect to closely monitor and review any instances of a banking entity exceeding a risk limit as well as any temporary or permanent increase to a trading desk limit. Preamble at 110.
79 Proposed Rule § _.4(b)(6)(ii). See also Preamble at 110. Page 17 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
80 Proposed Rule § _.4(b)(6)(iv). See also Preamble at 110. Page 17–18 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
81 2013 Rule § _.4(b)(2)(iii); Proposed Rule § _.4(b)(2)(iii). See also Preamble at 116. Page 15 of
Appendix A of this Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule. As is the case with respect to the underwriting exemption, the Agencies clarify that banking entities that do not have significant trading assets and liabilities are not relieved of the obligation to comply with the other requirements of the exemption for market making-related activities, but the elimination of the compliance program requirement for such banking entities is intended to provide these banking entities with “an appropriate amount of flexibility to tailor the means by which they seek to ensure compliance with the underlying requirements of the exemption for market making-related activities, and to allow them to structure their internal compliance measures in a way that takes into account the risk profile and market making activity of the particular trading desk.” Preamble at 117.
-49- Volcker Rule June 5, 2018
ENDNOTES (CONTINUED)
82
Proposed Rule § _.5. See also Preamble at 27. Pages 18–20 of Appendix A of this Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
83 2013 Rule § _.5.
84 2013 Rule § _.5(b)(1)–(2).
85 Proposed Rule § _.5(b). See also Preamble at 307.
86 Proposed Rule §§ _.5(b)(1)(i)(C); _.5(b)(1)(ii)(B); _.5(b)(1)(ii)(D)(2). See also Preamble at 130–
31. Pages 18–19 of Appendix A of this Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
87 Preamble at 130.
88 Preamble at 130.
89 Proposed Rule § _.5(c)(4). See also Preamble at 134–35. Page 20 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
90 Proposed Rule § _.5(c)(4)(ii). See also Preamble at 134–35. Page 20 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
91 Preamble at 135.
92 Proposed Rule § _.5(b)(1)(i)(C). See also Preamble at 129. Page 18 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
93 Preamble at 128.
94 Preamble at 128–29.
95 2013 Rule § _.3(d)(3).
96 The Proposed Rule’s definitions of “foreign exchange forward” and “foreign exchange swap”
reference the corresponding definitions of such terms in the Commodity Exchange Act. Proposed Rule § _.3(d)(3). See also 7 U.S.C. §§ 1a(24) and 1a(25).
97 The Proposed Rule defines a “cross-currency swap” as a swap in which one party exchanges
with another party principal and interest rate payments in one currency for principal and interest rate payments in another currency, and the exchange of principal occurs on the date the swap is entered into, with a reversal of the exchange of principal at a later date that is agreed upon when the swap is entered into. The Preamble states that this definition is consistent with regulations pertaining to margin and capital requirements for covered swap entities, swap dealers, and major swap participants. Proposed Rule § _.3(f). See also Preamble at 77 n.78 (citing 12 CFR § 45.2; 12 CFR § 237.2; 12 CFR § 349.2; 17 § CFR 23.151).
98 Proposed Rule § _.3(e)(3). See also Preamble at 76. Pages 8–9 of Appendix A of this
Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
99 Preamble at 76.
100 See Proposed Rule §§ _.3(e)(3)(i)–(vi). See also Preamble at 77. Pages 8–9 of Appendix A of
this Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
-50- Volcker Rule June 5, 2018
ENDNOTES (CONTINUED)
101
Preamble at 77–78.
102 Proposed Rule § _.3(e)(10). See also Preamble at 79. Page 10 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
103 Preamble at 27.
104 Preamble at 80.
105 BHC Act § 13(d)(1)(H).
106 2013 Rule § _.6(e)(3).
107 Proposed Rule § _.6(e)(3). See also Preamble at 140. Pages 23–24 of Appendix A of this
Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
108 Proposed Rule § _.6(e)(3). See also Preamble at 140. Pages 23–24 of Appendix A of this
Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
109 Preamble at 141.
110 Preamble at 142–43.
111 Preamble at 142.
112 Preamble at 146.
113 Preamble at 146.
114 BHC Act § 13(a)(1).
115 2013 Rule § _.10(b).
116 Preamble at 43–45.
117 For a discussion of the response to FAQ #14, please see our Client Memorandum, Agencies
Release New Guidance Providing Clarification Regarding Banking Entity Status of Certain Foreign Public Funds and Restricting Scope of Joint Venture Exclusion, dated June 12, 2015, available at https://www.sullcrom.com/volcker-rule-agencies-release-new-guidance-providing-clarification-regarding-banking-entity-status.
118 FAQ #16 is available on the Federal Reserve’s website at https://www.federalreserve.gov/
bankinforeg/volcker-rule/faq.htm.
119 Preamble at 49.
120 Preamble at 46.
121 For purposes of the policy statement, “foreign banking entity” means a banking entity that is not,
and is not controlled directly or indirectly by a banking entity that is located in or organized under the laws of the United States or any U.S. State. See also infra note 123.
122 For purposes of the policy statement (see infra note 123), a “qualifying foreign excluded fund”
means, with respect to a foreign banking entity, an entity that:
(1) Is organized or established outside the United States and the ownership interests of which are offered and sold solely outside the United States;
(2) Would be a covered fund were the entity organized or established in the United States, or
is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in financial instruments for resale or other disposition or otherwise trading in financial instruments;
(3) Would not otherwise be a banking entity except by virtue of the foreign banking entity’s acquisition or retention of an ownership interest in, or sponsorship of, the entity;
(4) Is established and operated as part of a bona fide asset management business; and
(5) Is not operated in a manner that enables the foreign banking entity to evade the requirements of the Volcker Rule or implementing regulations.
123 For a discussion of the policy statement, please see our Client Memorandum, Federal Banking
Agencies Release New Guidance on the Treatment of “Foreign Excluded Funds” Under the Volcker Rule, dated July 22, 2017, available at https://www.sullcrom.com/volcker-rule-federal-banking-agencies-release-new-guidance-on-the-treatment-of-foreign-excluded-funds-under-the-volcker-rule.
124 Preamble at 49.
125 Preamble at 52–54 (Questions #18–21).
126 2013 Rule §§ _.11(c)(2); _.12(a)(2)(ii). The “per-fund limitation” provides that the banking entity’s
(and its affiliates’) permitted ownership interest in a single covered fund that it organizes and offers generally may not exceed 3% of the total outstanding “ownership interests” of the covered fund at any time one year or later after the “date of establishment” of the fund. Such other relationships (in addition to sponsoring or serving as investment adviser or commodity trading advisor to the fund) are that the banking entity otherwise acquires and retains an ownership interest in such covered fund in reliance upon the organizing and offering exemptions under Section _.11(a) or (b) of the 2013 Rule and the Proposed Rule. 2013 Rule § _.11(c)(2). The Supplementary Information to the 2013 Rule (the “2013 Rule Preamble”) notes that a right to put the ownership interest in the covered fund to the banking entity would be considered a guarantee for this purpose; however, the restriction does not apply to arrangements not designed to guarantee the obligations or performance of the covered fund, however, such as entering into a liquidity facility or providing a letter of credit for a covered fund.
2013 Rule
Preamble at 5723.
127 2013 Rule §§ _.11(c)(2); _.12(a)(2)(iii). The “aggregate funds limitation” provides that the
aggregate value of the banking entity’s ownership interests in covered funds held under the organizing and offering and underwriting and market making-related activities exemptions may not exceed 3% of the banking entity’s Tier 1 capital, derived according to a specific calculation.
128 2013 Rule §§ _.11(c)(2); _.12(d). Under the 2013 Rule, all covered fund ownership interests held under the organizing and offering and underwriting and market making-related activities exemptions must be deducted on a dollar-for-dollar basis from the banking entity’s actual Tier 1 capital for regulatory capital purposes.
129 Proposed Rule § _.11(c). See also Preamble at 194–95. Page 36 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
130 Proposed Rule § _.11(c). Page 36–37 of Appendix A of this Memorandum contain the changes
made to this provision as between the 2013 Rule and the Proposed Rule.
Proposed Rule § _.11(c)(2). See supra note 126 (discussing such other relationships). See also Preamble at 194.
132 Proposed Rule § _.11(c)(2). Page 36 of Appendix A of this Memorandum contains the changes
made to this provision as between the 2013 Rule and the Proposed Rule.
133 The Volcker Rule includes a statutory exemption for “[t]he acquisition or retention of any equity, partnership, or other ownership interest in, or the sponsorship of, a hedge fund or a private equity fund by a banking entity pursuant to paragraph (9) or (13) of [Section 4(c) of the BHC Act] solely outside of the United States, provided that no ownership interest in such hedge fund or private equity fund is offered for sale or sold to a resident of the United States and that the banking entity is not directly or indirectly controlled by a banking entity that is organized under the laws of the United States or of one or more [U.S.] States.” BHC Act § 13(d)(1)(I). The 2013 Rule Preamble explains that “the purpose of this statutory exemption appears to be to limit the extraterritorial application of the statutory restrictions on covered fund activities and investments, while preserving national treatment and competitive equality among U.S. and foreign banking entities within the United States.” 2013 Rule Preamble at 5738.
134 2013 Rule §§ _.13(b)(1)(iii); _.10(d)(8).
135 2013 Rule §§ _.13(b)(1)(iv); _.13(b)(4)(iv).
136 Proposed Rule § _.13(b). See also Preamble at 204–08. Pages 42–44 of Appendix A of this
Memorandum contain the changes made to this provision as between the 2013 Rule and the Proposed Rule.
137 Following the issuance of the 2013 Rule, the Marketing Restriction became the subject of
uncertainty and industry comment, as it was unclear whether foreign banking entities would be able to rely on the SOTUS exemption with respect to investments in third-party covered funds, such as offshore feeder funds with U.S. tax-exempt investors or other covered funds, where the fund sponsor or investors other than the foreign banking entity had engaged in U.S. marketing activities. The staffs of the Agencies issued guidance through a response to FAQ #13 clarifying that the Marketing Restriction applies only to the activities of the foreign banking entity (including its affiliates) that is seeking to rely on the SOTUS exemption and not to the activities of third parties, including the sponsor of the covered fund, other investors and the covered fund itself. Thus, a foreign banking entity’s ability to rely on the exemption would not be lost as a result of third parties’ marketing or selling activities to residents of the United States, provided that the foreign banking entity has not itself offered for sale or sold an ownership interest in the fund to a resident of the United States or participated in such an offer or sale. Client Memorandum, Agencies Release New Volcker Rule FAQ with Critical Guidance for Foreign Banking Entities and Fund Sponsors; Clarify That U.S. Marketing Restriction Under “SOTUS” Covered Fund Exemption Does Not Apply to Third Parties, dated February 27 2015, available at https://www.sullcrom.com/volcker-rule-agencies-release-new-volcker-rule-faq-with-critical-guidance-for-foreign-banking-entities-and-fund-sponsors.
138 Proposed Rule § _.13(b)(3). See also Preamble at 205–07. Page 43 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
139 Proposed Rule § _.13(b)(3). See also Preamble at 205–07. Page 43 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
Proposed Rule § _.13(b)(4). See also Preamble at 203. Page 44 of Appendix A of this Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
141 Preamble at 203.
142 BHC Act § 13(d)(1)(C).
143 See 2013 Rule § _.13(a)(1).
144 Proposed Rule § _. 13(a)(1). See also Preamble at 199. Page 42 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
145 See Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and
146 2013 Rule Preamble at 5737. As the Agencies explain in the Preamble, “[t]he Agencies were
concerned that these transactions could expose the banking entity to the risk that the customer will fail to perform, thereby effectively exposing the banking entity to the risks of the covered fund, and that a customer’s failure to perform may be concurrent with a decline in value of the covered fund, which could expose the banking entity to additional losses.” Preamble at 198.
147 Proposed Rule § _.13(a)(1)(ii). See also Preamble at 199. Page 42 of Appendix A of this
Memorandum contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
148 Preamble at 199.
149 Preamble at 12.
150 2013 Rule § _.20.
151 Preamble at 213–14.
152 Preamble at 225.
153 Preamble at 224–26.
154 Preamble at 225.
155 Preamble at 225.
156 2013 Rule Preamble at 5758.
157 Preamble at 239–41.
158 Appendix at para. III.a. See also Preamble at 244.
159 Preamble at 286–88.
160 Preamble at 276, 282, 287.
161 Appendix at para. IV.a.3. See also Preamble at 271.
162 Appendix at para. III.b. See also Preamble at 245–53.
163 Appendix at para. III.c. See also Preamble at 256–60.
164 Preamble at 262.
165 Appendix at para. III.d. See also Preamble at 262. Page 57 of Appendix A of this Memorandum
contains the changes made to this provision as between the 2013 Rule and the Proposed Rule.
188 Form PF defines “securitized asset fund” to mean any private fund whose primary purpose is to
issue asset-backed securities and whose investors are primarily debtholders.
189 Preamble at 177.
190 Form PF defines (i) “liquidity fund” to mean any private fund that seeks to generate income by
investing in a portfolio of short-term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors; (ii) “real estate fund” to mean any private fund that is not a hedge fund, that does not provide investors with redemption rights in the ordinary course and that invests primarily in real estate and real estate-related assets; (iii) “securitized asset fund” to mean any private fund whose primary purpose is to issue asset-backed securities and whose investors are primarily debtholders (as noted at supra note 188); and (iv) “venture capital fund” to mean any private fund meeting the definition of venture capital fund in Rule 203(l)-1 under the Investment Advisers Act of 1940. Preamble at 178 n.172.
191 Preamble at 178–79.
192 Preamble at 160–71 (Questions #140–154).
193 Preamble at 173–75 (Questions #155–159).
-55- Volcker Rule June 5, 2018
ENDNOTES (CONTINUED)
194
Preamble at 185–86 (Questions #172–175).
195 Preamble at 185 (Question #173).
196 Preamble at 186–90 (Questions #176–180).
197 Preamble at 190–92 (Questions #181–182).
198 Preamble at 195–97 (Questions #183–185).
199 Preamble at 207–08 (Questions #189–193).
200 Preamble at 212–13 (Questions #194–202).
201 Preamble at 213 (Question #199).
202 Preamble at 212 (Question #195).
203 Preamble at 217 (Question #203).
204 Preamble at 223 (Question #209).
205 Preamble at 228–31 (Questions #210–212).
206 Preamble at 218–20 (Questions #204–208).
207 Preamble at 235 (Question #214).
208 Preamble at 244 (Questions #215–218).
209 Preamble at 289–94 (Questions #285–301).
210 Preamble at 253–63 (Questions #220–244).
211 Preamble at 264–68 (Questions #245–256).
212 Preamble at 270–72 (Questions #257–260).
213 Preamble at 273–75 (Questions #261–262).
214 Preamble at 277–79 (Questions #263–270).
215 Preamble at 284–86 (Questions #271–279).
216 Preamble at 288–89 (Questions #280–284).
-56- Volcker Rule June 5, 2018
ABOUT SULLIVAN & CROMWELL LLP
Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A,
finance, corporate and real estate transactions, significant litigation and corporate investigations, and
complex restructuring, regulatory, tax and estate planning matters. Founded in 1879, Sullivan & Cromwell
LLP has more than 875 lawyers on four continents, with four offices in the United States, including its
headquarters in New York, four offices in Europe, two in Australia and three in Asia.
CONTACTING SULLIVAN & CROMWELL LLP
This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The
information contained in this publication should not be construed as legal advice. Questions regarding the
matters discussed in this publication may be directed to any of our lawyers listed below, or to any other
Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If you have
not received this publication directly from us, you may obtain a copy of any past or future publications by
nt subject to tatement toiption of anesk strategany informd, such as
t have any ctronic doc
Method oulate any areport the
entifying In[Agency] o[Agency].
Trading Deapplicable
specified
any quantit_.20(d), creeports, as y of such reeasuremen
Appendix
s Informatir each risk uantitativefication labvity’s risk f
nformationr each risk d Loss Attrrisk factorother factoor other fa
Reference , limits idenssociated nformation
Attribution ntification es Informae Risk Fac
this appeno the [Agend reasongies, and w
mation the bfurther de
informatiocument sta
of Requireapplicable e Narrativenformationon the rep A banking
esk Informquantitativand publis
tative meaeate and mwell as sueports, for nt was take
x -57-
on Schedufactor sen
e measurebel for the factor cha
n Schedulefactor attr
ribution qur or other for, a descractor’s cha
Schedulentified in thrisk factor
n Schedule
Cross-Reflabel, risk
ation Schector Attribu
ndix by § _ency] descs for chanwhen any sbanking enscription o
on to reporating that it
ed Calculaquantitativ Statemen
n, and eachorting scheg entity muation, the ve measurshed on th
asurement maintain reuch informa
a period oen. A bank
ule that pronsitivity repement, incl
sensitivitynge unit;
e that provribution repantitative
factor, a unription of thnge unit;
that crosshe Risk anr sensitivitie; and
ference Scfactor sendule to asution Inform
__.20 muscribing any ges in thesuch channtity viewsof calculati
rt in a Narrt does not
ation and ve measurnt, the Tradh applicabedule estaust be repoQuantitativ
rement to the [Agency
furnished ecords docation as isof 5five yeking entity
ovides ideported puruding the y, a descri
vides identported purmeasuremnique idenhe risk fac
s-referencend Positionies identifi
chedule thnsitivities idsociated rmation Sc
t submit inchanges banking e
nge occurres as relevaon method
rative Stathave any
Reportingrement for ding Desk
ble quantitaablished inorted withive Measurthe [Agency]’s websit
to the Boacumenting s necessarars from thmust reta
Appendix
entifying anrsuant to thname of thption of th
tifying andrsuant to thment, tification tor or othe
es, by n Limits ed in the
hat cross-dentified inrisk factor hedule.
n a separain entity’s ed. The
ant for ds used.
tement, theinformatio
g
each Informatio
ative n § __.20 in the timerements cy] in e.
ard[Agencthe
ry to permihe end of in the
x A
nd he he e
d he
er
n
te
e on
on,
e
cy]
it
SC1:46
NarraIdentinform
IV.
the ctime, portiocurretools in § Sensposittradinand hand §__.5(a minexceRisk”desk
formaRisk FactoopenRisk varia
pursuthe Ruppe
chanevendeskmonirisk faexpe
71524.5
ative Statetifying Infomation wa
Quantita.
onstraints as defineonvalue ofent activity
used to co .4 and §
sitivities” aion limits ang desk’s ohedging ac§ __.5(b(b)(1)(i)(A)nimum, thept to the e” metrics abased on
at used byand Positior Sensitiv positionsand Positibles used
uant to thisRisk and Per and a low
ges in a trt of a chan’s profitabtored and actor senscted price
ement, the rmation fos reported
tative MeaA. Risk-M1. Risi. De that defind by the bf the tradinof the desontrol and__.5. A nnd “Value-and are usoverall actctivity undeb)(1)(i)(A) m) and also e “Risk Faextent any are demons the types
General Cy the bankiion Limits
vities, but m. When criion Limits,to assess
A. A banks quantitatosition Limwer limit),
ii. Ca
iii. Me
iv. Ap
2. Risi. De
rading desnge in oneility and rismanaged
sitivities m variation
Trading Dor a period d to the [Ag
asuremenManagemesk and Po
escription: e the amoanking en
ng desk's lisk. Risk an monitor riumber of t-at-Risk anseful in evativities, paer § __.5must meetmust incluctor Sensiof the “Risstrably ineof position
Calculationing entity fare often emay also biteria other both the v
s whether t
king entity mtive measumits Informand the va
alculation P
easuremen
pplicability:
sk Factorescription: k’s Compr
e or more usk. A bankas part ofust be suffin the trad
Desk Informof five yea
gency].
nts ent Measuosition LimFor purpo
ount of risktity for a simitsdesk’snd positionisk taking the metricsnd Stress Valuating anrticularly fo5. Accordt the applicude approptivities” an
sk Factor Seffective fons traded
n Guidancefor the purexpressedbe expressr than VaRvalue of ththese limit
must provurement: th
mation Schalue of usa
Period: On
nt Frequen
: All trading
r SensitiviFor purpo
rehensive underlying king entity f the tradinficiently gring desk’s
Appendix
mation, anars from th
urements mits and Uoses of thisk that a trapecific trads risk or po
n limits andand includs that are Value-at-Rnd setting or the maringly, the lcable requpriate metrnd “Value-aSensitivitieor measurinby, and ris
e: Risk andrposes of rd in terms osed in termR or Risk Fhe Risk ands have be
ide the folhe unique edule, theage of the
ne trading
ncy: Daily.
g desks en
ties oses of thisProfit andvariables must repo
ng desk’s oranular to as holdings.
x -58-
nd the Quahe end of t
Usage s appendixding desk ding desk.ositions thd their usade, but aredescribed
Risk,” relatthese limitrket makinlimits requuirements rics for theat-Risk anes” or “Valung and mosk exposur
d Position risk managof risk mea
ms of otherFactor Send Position en reache
lowing infoidentificat limit size limit.
day.
ngaged in
s appendix Loss thatthat are s
ort the risk overall riskaccount fo. A banking
antitative Mthe calend
x, Risk andis permitte
. Usage rehat are accage are keye not limite below, incte to a tradts in the brg activitiesired underunder § _
e trading dd Stress Vue-at-Riskonitoring thres of, tha
Limits mugement of asures, sur observabnsitivities a
Limits anded must be
ormation fotion label f(distinguis
covered t
x, Risk Fact are expecignificant sfactor sen
k managemor a prepong entity mu
Measuremedar year fo
d Position ed to take
epresents tcounted foy risk mand, to, the lcluding “Rding desk’sroader cons under § r § __.4
__.4(b)(2)(esk limits
Value-at-Rk and Streshe risks of t desk.
ust be repoeach tradi
uch as VaRble criteria,are used tod the value
e reported.
or each limfor the limishing betw
rading act
ctor Sensitcted to occsources ofnsitivities thment policynderance oust provide
Appendix
ents r which the
Limits areat a point
the r by the
nagement imits set o
Risk Factors risk and ntext of the __.4(b) (b)(2)(iii) iii) and § including,
Risk” metricss Value-af a trading
orted in theing desk. R and Risk, such as no define the of the
mit reportet reported
ween an
tivities.
tivities arecur in the f the tradinhat are y. Reporteof the e the
x A
e
e in
out r
e
at cs at-
e
k net e
d in
e
ng
ed
SC1:46
followmeasFactofactochan
sensmanaFactomanamoniexplicmustthe tr
Facto
commsensmatu
granuposit
spreasensmatu
volatsignif
betweand i
currecorrelinea
with rsens(paraposit
factoconsdesk
71524.5
wing informsurement: or Sensitivr sensitivitge in risk f
itivities thaagement por Sensitivagement mtored and cit risks ast be sufficierading des
or Sensitiv
modities seitivities (exrity profile
ular to accions, and
ads, shifts itivities (exrity profile
ility, and/oficant non-
een impornternation
ency pairs elation senrities), as w
respect to itivities (ex
allel and noions.
r shared bistently acto anothe
mation for the unique
vities Informty, and thefactor.
General Cat are monpolicy. Thevities will dmodels emmanaged
ssumed byently granusk's holding
Trading devities, inclu
• Commoet out in 17xpressed i
e of the pos
• Credit pcount for sprisk factors
• Credit-re(parallel a
xpressed ie of the pos
• Equity dor correlatio-linearities
• Equity prtant equitynal equities
• Foreign and matursitivities (ewell as the
• Interest major inte
xpressed ion-parallel
The methoby multiplecross its traer.
each sense identificamation Sche aggregat
Calculationnitored ande underlyinepend on
mployed. Thby a tradi
y the tradinular to accgs.
esks mustuding, for e
odity deriva7 CFR 20.n a mannesitions;
positions: rpecific cres with resp
elated derand non-pan a mannesitions;
derivative pon sensitiv
s), and the
positions: ry market ss;
exchangerities, expoexpressede maturity
rate positerest rate cn a mannel) in the int
ods used b trading deading desk
sitivity that ation label hedule, thete change
n Guidanced managedg data andthe specifhe numbeng desk, ang desk. Incount for a
t take into example, th
ative positi.2, the mater that dem
risk factorsedit sectorspect to inte
rivative posarallel) in cer that dem
positions: vities (exprmaturity p
risk factorssectors and
e derivativeosure to in in a mannprofile of t
ions, inclucategorieser that demterest rate
by a bankiesks, suchks so that t
Appendix
is reportefor the ris
e change in value a
e: A bankind as part od methodsfic functionr and typeand furnishn general, a preponde
account ahe followin
ions: risk fturity of thmonstrates
s with resps and markerest rates
sitions: riscredit spremonstrates
risk factor ressed in aprofile of th
s for equityd segment
e positionsnterest ratener that dethe positio
ding interes and matumonstratese curve, as
ing entity th as an eqthe sensiti
x -59-
ed pursuansk factor sein risk factcross all p
ng entity mof the tradis used to cn of the trae of Risk Fahed to the however,
erance of t
ny relevanng with res
factors withe positionss any signi
pect to credket segmes of all rele
k factor seeads—volas any signi
sensitivitiea manner he position
y prices ants, such as
s: risk factoes at relevaemonstratens; and
est rate deurities and s any signi well as th
to calculateuity price fivities can
nt to this quensitivity litor used topositions o
must reporng desk's compute a ading desk actor SensBoard, wiReported
the expect
nt factors ispect to pa
h respect ts, volatilityificant non
dit spreadsents, the mevant matu
ensitivitiesatility, and/ificant non
es such asthat demo
ns;
nd risk facts a small c
ors with reant maturies any sign
erivative povolatility aificant non
he maturity
e sensitivifactor, mube compa
uantitativested in the
o determinf the desk
t the risk foverall ristrading deand the in
sitivities thll depend orisk factored price v
n calculatiarticular as
to the relay and/or con-linearities
s that are maturity prourities;
, for exam/or correlan-linearities
s equity poonstrates a
tors that dcapitalizati
espect to mties, volatinificant no
ositions: riand/or corrn-linearitiesy profile of
ties to a cost be appl
ared from o
Appendix
e e Risk e the risk given the
factor k esk's Risk nternal riskhat are on the r sensitivitiariation in
ing Risk sset classe
ated orrelation s), and the
sufficientlyofile of the
ple credit tion s), and the
ositions, any
ifferentiateon equities
major ility, and/o
on-
sk factors relation s), and shithe
ommon ied one trading
x A
k
ies
es:
e
y
e
e s
or
ifts
g
SC1:46
commgivena speappeof thepositbase
and Sshouthe tirequiand rwherlargeor Stconsof po
activitradinexclu
Loss positinto twere (ii) pr(“newpositcompmusttradin60- abankloss a
71524.5
monly usedn set oftradecifiedone-endix, Strese risk of fuions at thed on mark
Stress VaRld reflect ame over arements imreported inre a tradinger aggregaress VaR istent with
ositions.
ities. For Sng desks wuded from
b.
Attributionions to varhree categ also positrofit and low positionsions or newprehensivet calculate ng desk's oand 90-daying entity dat each po
rities that ae securitiesrately repot securitiesbles, notio
283: See §urity” and ad swaps a
uct underw
sures four ing entity ucted by t
omers, excre the transnizational rities, valu
purposes oe Transactvatives,” aalso derivatitative me
erwriting acthat reliesified in § _
284: See §
uct underw
ustomer-F
measures lute value
e of the tra
atives, oth
are also “ds that are ort the trads positionsonal value
§§ __.2(i),a “derivativare reporte
ii. Ca
iii. Me
iv. Apwriting act
2. Trai. Deexclusive is requiredhe trading
cluding intesaction is units wher
ue means gof calculatition Volum
as those teatives as “deasuremenctivity is a s on § __.4__.4(b)(3)
§§ __.2(i),
ii. Ca
iii. Me
iv. Apwriting act
Facing Ac1. Invi. Dethe turnovof all tran
ading desk
ii. Geher than op
derivativesalso derivading desk’ss, market v
of derivati
, (bb). For ve.” For pu
ed as deriv
alculation P
easuremen
pplicability:ivity or ma
ansactionescription: categories
d to report g desk withernal transbooked in re the trangross marng the Tra
mes calcularms are de
derivativesnt, a customarket pa4(b) to con.
, (bb).]
alculation P
easuremen
pplicability:ivity or ma
ctivity Meaventory Tescription: ver of a trasactions o
k's inventor
eneral Calcptions and
s,” as thoseatives as “s market vvalue of deives receiv
example, urposes ofvatives rath
Period: On
nt Frequen
: All tradingarket-makin
n VolumesFor purpos of coverethe value
h: (i) custosactions; (ithe same saction is ket value. ansaction Vation for “sefined und
s.”[FN 284]omer of a tarticipant idnduct mark
Period: On
nt Frequen
: All tradingarket-makin
asuremenurnover For purpo
ading deskover the rery at the b
culation G interest ra
Appendix
e terms ar“derivativevalue of lonerivatives rvables, an
under thisf the Positiher than se
ne trading
ncy: Daily.
g desks thng-related
s oses of thised tradingand numbmers, excliii) trading banking ebooked inFor derivaVolumes qsecurities” der subpar] Further, frading desdentified inket making
ne trading
ncy: Daily.
g desks thng-related
nts
oses of thisk's inventorporting peeginning o
Guidance: Fate derivat
x -62-
re defined es.”[FN 283ng securitireceivablesd notional
s part, a seions quantecurities.]
day.
hat rely on d activity, re
s appendix activity co
ber of seculuding intedesks and
entity; and nto an affiliatives, valuquantitativethose sec
rt A; insteafor purpossk that relien § __.4(a)g-related a
day.
hat rely on d activity, re
s appendixry. The nu
eriod. The dof the repo
For purpostives, valu
under sub3] A bankiies positios, market vvalue of d
ecurity-bastitative me
§ __..4(a)espectivel
x, Transaconducted burity and dernal transad other org(iv) tradinated bankue means e measure
curities thaad, report tses of the Tes on § .4)(7), and a
activity is a
§ __..4(a)espectivel
x, Inventormerator ofdenomina
orting perio
ses of this e means g
bpart A; insng entity mns, markevalue of d
derivatives
sed swap ieasuremen
) or § __..4y.
ction Volumby a tradinerivative tactions; (iiganizationg desks a
king entity.gross not
ement, do t are also those secuTransactio(a) to cond
a customera market pa
) or § __..4y.
ry Turnovef the ratio tor of the r
od.
appendix,gross notio
Appendix
stead, repomust t value of erivatives
s payables
is both a nt, security
4(b) to
mes ng desk. A ransactioni) non-al units nd other For ional valuenot includ
urities thaton Volumeduct r of a tradiarticipant
4(b) to
er is a ratiois the ratio is the
, for onal value
x A
ort
.
y-
ns
e. e
t s
ng
o
e
,
SC1:46
for opmean
purpoof theof timAgingpositdaysSecusecumeasunde
[FN 2
usingaggreschedliabiliderivvalue
Ratiotradindeskinvolvinvolvcompthe trthe tr
Facincounrelateconti
71524.5
ptions, valns 10-year
oses of thie trading d
me that thog shouldmions for th; 91-180 c
urities Inverity liabilitysurement, er subpart A
285: See §
g a tradingegate assedule and aties held oatives, val
e and, for i
o is a ratio ng desk to. A trade cving a couving a couputed that rading desrading des
ng Trade Rterparty ised servicenuing rela
ue meansr bond equ
iii. Ca
iv. Me
2. In3. Sei. Des appendi
desk's aggose assets
must measue following
calendar daentory Aginy-aging schdo not incA. [FN 285
§§ __.2(i),
General C desk's traets and liaa liability-aover all holue meansnterest rat
ii. Ca
iii. Me
iv. ApunderwritiCustomei. Decomparing
o (ii) the tracount baseunterparty tunterparty trecords th